Lease Calculator With Negative Equity – Canadian Auto Brokers helps Canadians get better auto loans with lower rates, lower payments and up to $30,000 in cash back
The average Canadian has nearly $73,000 in total debt. Non-mortgage debt, which includes credit card debt and yes, car loans, is nearly a third of that, or $23,800.
Lease Calculator With Negative Equity
Moreover, almost one in three cars sold in 2018 had negative equity. All of these “negative stocks” had an average value of -$7,051.
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If you’re one of these people, you’re probably wondering, “How can I get rid of negative equity on my car?” You may not even be sure what negative amounts are and how they affect your finances.
However, don’t worry as we are here to clear things up for you. Keep reading to learn all about negative equity cars and what to do about it!
The term “equity” means ownership of assets that have associated “liabilities”. Liabilities usually take the form of outstanding debts or loans.
When it comes to auto loan liability, it usually refers to how much you still owe the lender. Negative equity occurs when the amount owed exceeds the actual value of the car. Some people also call these “reverse” or “underwater” auto loans.
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Either way, this means you owe the loan lender more money than the car’s financial value.
It’s pretty easy to know if you have negative equity by knowing these two basic factors. Then simply subtract the outstanding amount of your car loan from the market value of your drive. If it turns out to be negative, then you have negative equity.
Take for example the average car loan debt of $20,000 in Canada. Let’s also say that the actual market value of your vehicle is only $15,000.
So $15,000 (the market value of your ride) less/minus $20,000 (your car loan balance). This means you have negative equity of $5,000.
Negative Equity Car Finance Explained
Depreciation, interest rates, credit rating and advances play an important role here. The same applies to the term of the loan you choose, the type of car you drive and your driving behavior.
We’ll quickly touch on all the factors below so you can better understand how you can end up with negative equity.
New cars depreciate on average by 30-40% only in the first year of operation. Most actually fare better against depreciation, but others lose even more. Japanese cars like Toyota and Honda seem to hold the most value over time.
You can also get negative equity if your car has a faster depreciation rate. The same is true if you make small monthly payments on your auto loan.
Negative Working Capital
In Canada, interest rates on car loans range from 4.5% to 10%. The lower the interest rate you can get, the less you owe the lender. This, in turn, reduces the risk of going “underwater” on a car loan.
Traditional car lenders, like banks, take credit ratings seriously. As such, they typically charge higher interest rates for Canadians with low or bad credit. Most others categorically reject such applicants.
That said, your credit score is one of the most important things you need to know before applying for a car loan. You can get this for free from Canadian car brokers and it will inform you about your financial situation. If it’s too low, don’t expose yourself to bank credit checks, which can lower it even further.
Paying a down payment on a car loan reduces the amount of equity the lender has to put up. As a result, the borrower owes the credit organization less.
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It also means that the interest rate is applied to a smaller loan amount. So you can enjoy lower interest payments.
In general, a down payment minimizes the gap between the borrowed money and the actual value of the car. On the other hand, not paying the down payment can also contribute to negative equity.
If you can afford to pay off your car loan in five years, then you should secure a five-year loan. This is because the longer the term, the higher the interest. This, in turn, increases the total amount you owe on your car.
The make and model of your car also affects its price, so the nicer your car is, the more expensive it becomes. Luxury vehicles are even more expensive to insure, so this can increase your car costs as well.
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Depending on how you drive it, high wear and tear while driving results in faster depreciation. Lack of proper care also leads to faster deterioration. All of these can cause your car’s value to drop below that of similar makes and models.
Negative equity is usually not a big deal if you intend to keep your car as long as it can last. In Canada, this often means driving one car for an average of 12.88 years. In this case, you may not even know you had negative equity at some point.
Owing more on your car loan than it’s actually worth becomes a problem if you want to trade it in for a new car in just a few years. If you are found to have negative equity, you will no longer be able to use your old car to pay for a new one. You may even have to shell out more than you probably budgeted for a brand new car.
Things can get worse if you have negative equity and your car gets into an accident. Your auto insurance company will write you a check, but it still won’t be enough to pay off all of your auto loan debt. You will have to cover the rest with your own money.
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The same is true if you get sick, lose your job, or face a serious life event that prevents you from repaying your loan. You can’t just sell the car because it still has a lien on it. Even if you find a willing buyer, the money you get from the sale still won’t be enough to pay off the car loan.
Refinancing is one of the best options to get rid of negative equity while you’re on the road. You can even take advantage of the cash back program or buy a new car and cancel your old car debt!
Most Canadians can’t afford not to own a car, given how 11.4 million of them drive to work. If you can’t give up your car, you may want to consider refinancing your current car loan.
Refinancing makes it possible to reduce the interest rate on a car loan. With loan refinancing, you will take out a new loan instead of the old one (and most likely with a high interest rate). It is a new contract that foresees not only a reduced interest rate, but also better payment terms.
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By refinancing a car loan, you can shorten the term of the loan. This can help you get out of an underwater loan because you will pay more for the loan. Higher payments toward your debt reduce your car’s negative equity.
Being able to lower your interest rate also means you make your loan more affordable. The lower the rate, the less of your money goes to just paying interest. At the same time, most of your loan payments cover the actual principal amount of the loan.
The lower your loan principal amount, the lower your negative equity. Also, keep in mind that refinancing doesn’t involve selling your car to get the loan back. That way you don’t have to worry about not being able to get to work.
When considering refinancing, be sure to check for additional benefits, such as cash back. You can even qualify for up to $30,000 back when you refinance your existing car! It still depends on the type of car you own, but programs like these can help you balance your equity.
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The same cashback offers usually apply to new car sales. If you get approved, you can enjoy a huge cash discount that can erase your negative equity! At the very least, the cash back you’ll receive will eliminate most of what you still owe on the old car.
In addition to cashback offers, there are also referral programs offered by auto brokers. You will be paid every time a person you refer to a broker signs a contract with that firm. You can then use the money you earn to make extra payments on your own auto loan.
By paying more for your auto loan, you also reduce your negative equity. Each additional payment you make will help you get out of the reverse mortgage.
There are many other ways to earn extra income, such as getting side gigs outside of your main job. In fact, it’s become quite common in the Great White North, where one in three Canadians has a “side hustle.”
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